Economic Barometer

South African economy heading for some very choppy waters

Lesetja Kganyago takes over in stormy times
Lesetha Kganyago.jpg

With both the International Monetary Fund (IMF) and the SA Reserve Bank (SARB) having pegged down its growth prospects, facing a complexity of challenges and uncertainties, the South African economy looks to be heading for some serious choppy waters in the near to mid-term.

Lesetja Kganyago, the recently appointed new governor of the SARB, could hardly have started off in his new position at a more crucial time:

The IMF’s World Economic Outlook (WEO) report, released last week, warns about a number of emerging risks to financial stability and the global economy. Among other things it states that financial policies are key to address what it calls a new imbalance between economic and financial risk-taking.

On the domestic front some commentators warn that the country might be heading for a financial crisis, which could see the value of the rand drop to R12 to the US dollar.

The new SARB governor, fortunately, has two factors going for him. In the private sector there is plenty of goodwill towards him and his appointment was widely welcomed and judged as having been a good one. On the political/government side Dr Bonke Dumisa, an independent economic analyst, tells us that Mr Kganyago is an example of “good cadre deployment”. He is not only well qualified for the job, but has an understanding of how the governing party works.

The present prognosis of the health of the South African economy is one of a troubled patient at a crucial point – the situation can become critical if not treated with great care.

According to news reports about actions and declared intentions by government, the signs seem to indicate that the Union Buildings are aware of the situation. Whether Luthuli House and its governing alliance will allow the South African economy to diligently stay on the course of recovery and prevention, remains to be seen.

Symptoms of the illness

Some of the vital signs of an economy under stress and in danger of going south, include:

• Mounting evidence of both physical and institutional infrastructure under strain, from electricity supply constraints, water delivery failures, inadequate and badly maintained road networks and a R30 bn maintenance backlog at Transnet, to a parliament at odds with itself and key watchdog institutions under threat to a labour relations dispensation in disarray;

• The downgrade in growth prospects by both the IMF and SARB. The country has experienced some other telling downgrades on other fronts. The business confidence index is hovering at a 14-year low, from position 41 in the Economic Freedom of the World report to number 93, its gross domestic product growth rate slowed to 1.9% in 2013, compared with 2.5% in 2012 and it is ranked stone last out of 144 countries in the latest World Economic Forum’s Global Competitiveness Report;

• That consumer discretionary spending is set to come under pressure, as would the inflation rate of the just announced 12.69% increase in electricity tariffs, which is double the current inflation rate;

• That, while South Africa’s employment figures in the formal, non-agricultural sectors increased by 155 000, or 1.8% between March and June of this year, the bulk of those jobs, 143 000, were created in the community service sector and not productive sectors;

• The rand having dropped by more than 10% in less than three months and is set to decline further, perhaps even dramatically so, in the weeks and months ahead, according to Magnus Heystek of Brenthurst Wealth Management; and

• South Africa's trade deficit more than doubling to R16.3 billion ($1.45 billion) in August from a revised R6.82 billion shortfall in July, according to data released by the South African Revenue Service last week.

Repercussions

Probably the most dangerous and immediate repercussion of this state of affairs is the risk of the spreading of what Heystek calls a “low-intensity social uprising in many parts of the country in the form of service delivery protests”.

In an article last week we warned that the combination of the postal strike, power failures and the interruption of water supplies create circumstances under which “one error of judgement” can make for a volatile situation in communities. Later in the week protest broke out in the Free State municipalities over plans to cut electricity supplies to local residents.

On the employment front some 70% of the 580 000 job opportunities created in the formal sector since 2010 were in the public sector. It is a trend tha could become unsustainable due to the pressure it creates on the fiscus in the face of the low levels of growth in the economy – which again could lead to pressures on social stability if cutbacks become unavoidable.

At the same time, as government’s share of the economy and the employment pool keeps growing, the manufacturing sector has in the past six years shrunk from 16.4% of the economy to 11.1%. Over the same period general government services have grown from 12.4% of GDP to 17.2%.

 Under the prevailing circumstances, an increasing number of multi-national companies are hedging their investments in South Africa, with some commentators calling it “a great trek” from the country.

While South Africa’s economic growth prospects have shrunk from July’s 1.7% to 1.4%, below the 3% potential as judged by the IMF, the real danger lies in the fact that it is almost 4% below government’s target of 5%-plus per year. The 5%-plus rate is what it estimates is needed to address high unemployment and poverty – crucial to maintain social stability.

Causes of the illness

The causes of the un-well state of the South African economy are complex and the country does not have control over some of them and neither are all of them unique to South Africa.

However, according to the IMF and most economic commentators much of the causes are indeed home grown.

In fact, it is revealing to what extent the IMF’s assessment lines up with some of the ‘symptoms’ listed above. The WEO report lists as reasons for the country’s under-performance, besides being partly due to weak global demand, as:

• Growth being dragged down by industrial tensions and delays in fixing infrastructure gaps, including electricity constraints;

• The existence or the need for “removing infrastructure bottlenecks in the power sector, for implementing reforms in education, labour and product markets to raise competitiveness and productivity, and for improving service delivery;

• The recent slow pace of implementing infrastructure investment plans, in spite of the government investing billions of rand in infrastructure development;

• strikes disrupting the construction of infrastructure such as power stations.

Other problems on which there is broad consensus among commentators are:

• Very rigid labour laws, which also hamper some other countries, including France;

• Perceptions about a high incidence of corruption with for instance tender processes;

• Uncertainty about the security of investment due to some legislative programmes of government, like the Mineral and Petroleum Resources Development Act (MPRDA), the Private Security Regulatory Amendment Bill and the termination of bilateral investment treaties in favour of the Promotion and Protection of Investment Bill and policy suggestions on issues like agricultural land ownership that create uncertainty about property rights in general; and

• The high cost of doing business in the country and policy uncertainties, that, more than low growth prospects, are driving investors away, according to the South African Chamber of Commerce and Industry.

Special government attention

In a recent statement by the presidency it was announced that President Jacob Zuma will during October focus on the economy and “take forward government’s commitment to prioritise the economy and local government”.

Apart from meetings that Mr Zuma has already had and will be attending where the focus will on various key sectors of the economy, there have also been indications that government is at least attempting to address some of the economic concerns.

These include:

• An announcement by Mineral Resources Minister Ngoaka Ramatlhodi last week that the MPRDA, which is already on the president’s desk, is likely to be referred back to parliament to deal with some concerns in that sector;

• Deputy President Ramaphosa’s recent announcement that a National Labour Relations Indaba is to be convened in November to enable the social partners to engage around the root causes of South Africa’s unstable labour relations environment;

• Plans for the Presidential Business Working Group to discuss joint action for economic growth at their meeting on October 24 in Pretoria; and

• Public Works Minister Thulas Nxesi’s appeal for private sector support in the staffing of the new-look Property Management Trading Entity (PMTE), which is seen as the primary instrument to rid the department of fraud, corruption and maladministration.

Only time will tell if government will be able to get all its ducks in a row and if the IMF is correct there are likely to be some curve balls on the global front. Resistance can also be expected from some of the alliance parties.

The ANC’s own secretary-general, Gwede Mantashe, last week in the middle of the government’s charm drive directed at the private sector, launched an attack on the private sector, accusing them of being unpatriotic and business of being on an “investment strike”.

One way or another, the country is heading for some turbulence on the economic front.

by Piet Coetzer

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